3 Minute Gold News

Jim is the Chief Global Strategist for West Shore Funds, editor of Strategic Intelligence, former general counsel for Long Term Capital Management, and a consultant to the U.S. Intelligence community and the U.S. Department of Defense.

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Jim Rickards

The currency devaluation, which is ongoing, and you’ve got the stock market selloff.

CHINA CURRENCY DEVALUATION

People laugh when you remind people that the Chinese are communists, but the fact is that they are communists and they know anything really about capital markets.

Putting communists in charge of capital markets is like giving a loaded gun to a three year old — there’s going to be some damage, and we’re seeing the damage around the world.

China did a shock devaluation last August, and the one thing you know about the international monetary system is that you never shock the system.

You always let people know what’s coming.

The Chinese learned from that and started a series of mini-devaluations in December.

They had to devalue the currency. There is the Impossible Trinity of a pegged exchange rate, an open capital account and independent monetary policy, which goes back to Robert Mundell in 1960.

It’s impossible to have all three at the same time, and the Chinese were try that. Something had to break.

They couldn’t close their open capital account because there’s too much pressure from the IMF. They’re not going to give up independent monetary policy because they certainly don’t want to raise rates because of the capital outflow. So they have to devalue the currency, and that’s going to continue.

CHINA’S STOCK MARKET

As far as the stock market is concerned, China had these sort of blunt force, binary circuit breakers.

In New York, if the stock market goes down a certain amount they shut it down for a certain period of time, and then they reopen it — they do it gradually.

The purpose of circuit breakers is not to stop the market from going down completely, it’s to give people time to think.

So China is probably going to get rid of them because what they have is too crude. They may come back with better ones, but in the meantime they’re not going to have circuit breakers.

We should expect their market to continue to go down.

There is some feedback over to the U.S. but the U.S. has its own problems.

2008 CRISIS COMPARISON

George Soros has said this meltdown could be as significant as the financial meltdown in 2008. Jim disagrees.

There will be a financial catastrophe that is much greater than 2008. You can see that coming… but not yet. This is not it. It’s probably still a few years away.

Jim says he wouldn’t underestimate the number of policy tools that the Federal Reserve and other central banks have at their disposal.

The Fed is not out of bullets. They could cut 25 basis points. Jim doesn’t think they will, he thinks they’re going to raise rates two more times before they cut.

They could go to negative interest rates. They could trash the dollar and get back in on the currency wars. They could work with the Congress on helicopter money. They could do QE 4. They could also use Forward Guidance.

There’s a lot the Fed could do.

They’re not going to though. They might get involved if the S & P gets below 1700. But between now and if it gets below 1700 the Fed doesn’t really care what the stock market does.

CHINA CONSUMER DEMAND

Jim isn’t sure that consumer demand is there in China.

There are a lot of Chinese people, obviously, but their income distribution is wildly skewed.

They have a middle class of 200 million sitting in the middle of a population of about 1.1 billion people. A lot of those people are practically eating bark off of trees — they’re pretty poor so they’re not in the game.

Of those that do have some money, a lot of them sank their money into over-valued assets of real estate and stocks, so they’re taking a beating.

They also have a very high propensity to save.

So this transition into a consumer driven economy is something that will play out over five or ten years.

It’s not going to rescue the situation today.

China’s growth has hidden air pockets — it’s going to go down a lot.

FED

The Fed is going to tighten first and then they’re going to ease. They’ll have to blink because they’re tightening into weakness.

Jim and a lot of other analysts can see the weakness but the Fed cannot see the weakness because they don’t look at the real world — they look at models.

Their using models like the Philips Curve which are flawed and obsolete. The Phillips Curve was dead and buried in 1981 but apparently like a zombie it’s come back to life.

So the Fed sees inflation around the corner which is nonsense.

They see strong growth which is nonsense.

The Fed is going to keep raising, not based on the real world but based on their models.

Meanwhile back in the real world the U.S. economy is probably headed to recession. By late summer even the Fed, who are the last to know, will see it by then.

The problem then is that say the target is 75 basis points — they’re not going to be able to cut rates because it’s sixty days before the U.S. election.

It would be seen as a blatantly political act and Ted Cruz would go burn down the Fed.

All they’ll be able to do at that point is Forward Guidance — talk about cutting rates — and then maybe do a rate cut in December.

Jim calls it “The year of the Boomerang”: they’ll tighten for the first half (which is a huge blunder) and then go to some kind of easing, probably Forward Guidance, in the second half.

The Greek bank holiday and long lines to get a few euros for the day. Debt deals behind closed doors. The media telling us what opinions to have. China building islands in the South China Sea and claiming all the international waves. More dealing to come. More standing in line for those who owe. Who owes? There’s a long line of nations in debt and this is far from done.

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Nothing on this site is intended as individual investment advice. We’re all watching which way the wind is blowing.